Tea Leaves

After a blazing start to the year in January, stock prices began to fade last week of February, ending the month down 2.4% as measured by the S&P 500.  The February fizzle had mostly to do with some stronger wage data that investors fear will prolong the Federal Reserve’s interest rate hikes.  In my opinion,  although the market has given back some of its gains, it is now largely betting on the Federal Reserve and the economy more broadly navigating a “soft landing”; working its way out of higher interest rates and a tight labor market without dropping into the dreaded recession zone.            

The rising interest rate backdrop pressurizing stock multiples is no longer in play the way it was in 2022.  The forward P/E ratio on the S&P 500 is 15.5x versus a 25 year average of 16.8x, according to JP Morgan Research.  While inflation is still a factor, it is diminishing.  There are signs that wage growth has crested, and the structure of the labor force supply (immigration, early retirement, social distancing) is beginning to sort out post COVID.    

The key to stock prices remains earnings.  In 2022, EPS for the S&P 500 fell 5.7% largely as a result of a 17% COVID-related drop in margins. In 2023, I am confident our companies will deliver on their forecasted earnings we will see quality growth stocks re-establish themselves as market leaders.  With that in mind, we are adding to the portfolio in the micro-chip, electric power infrastructure, and telecom areas (echoing the Infrastructure Investment Act and the CHIPS and Science Act).  From a thematic perspective, we want to own stocks linked to the coming fiscal stimulus. While analysts typically over-estimate earnings forecasts, and earnings fall over time, I am willing to bet earnings hold up in 2023.      

Technical analysts (the folks that read the tea leaves) are encouraged by the market’s recent strengthening and are expressing a greater degree of confidence in the market’s near- and medium-term outlook than any time in the last year.  This is a positive for us.  The stock market largely needs to digest its recent run and become comfortable with the forward earnings outlook.  This trading pattern is often called “backing and filling” where stock prices have to re-establish a new floor, or level of support, before moving higher.  This takes time and often results in the saw-tooth-like behavior that can often be frustrating but is actually necessary and constructive.       

As you know by now, on February 23rd we announced we our merger with GYL Financial Synergies, an investment advisor similar to us, located in West Hartford CT.  You have received a consent agreement (either via email or traditional mail) to sign.  Please click through the Docusign or reply by mail.  If we don’t hear from you, I will reach out.  The agreement simply allows us to keep working with you, as we always have, but now as a part of GYL.  Important for you to know is that our team and I will be here looking after you as we always have.  Nothing about how we interact with you or your accounts custodied at Schwab will change.         

The merger will allow us to upgrade some aspects of our overall offering (such as the eMoney financial planning dashboard, and high-end family office services), as well as investments in some asset classes we do not regularly utilize in client portfolios (private real estate, private equity, alternative investments) that are becoming more popular and require a good deal of oversight.  I want us to remain current as the world of investment management and financial planning continues to evolve.  As some of our competitors move into this space, my goal is to stay at the head of the pack.

This is especially applicable as we position ourselves to provide the best possible advisory services to the next generation as their needs and interests are evolving from those of prior generations.  I intend for us to be as relevant to your children and your grandchildren as we have been for you.  

Please do not hesitate to call with any questions relating to our merger, your accounts or if you are missing any of your tax information.  We are in the office and always look forward to seeing you; of course we can also call or Zoom. 

Take good care.

Bruce Hotaling,

CFA Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are as of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation. This note contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

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